4 Most Common Mistakes When Buying Turnkey Real Estate

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I have been working with turnkey buyers for the past 6 years and I have come to find that there are some common mistakes that many investors make when they start looking at turnkey properties.  Some of the mistakes cost investors money.  Some of the mistakes cost investors time.  All of the mistakes carry little lessons with them that can easily help an investor avoid making the same mistakes twice!  Now, if we would all only listen…

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History Repeating Itself

Looking back over the last few years, there is one thing we all can agree on.  This has been one heck of a ride for the real estate market.  What I find really interesting though is that even with such a wild ride, there are still lists out there of things you need to avoid.  Oddly enough, there are still many investors who are choosing to not learn from history.  They are still making some poor decisions and many are finding it easier to fool themselves than to exercise a little more patience. Although any list is going to be subjective and without a doubt, incomplete, this list at least gives a starting point for investors looking at turnkey investments.

Money Burning A Hole In Your Pocket?

I guess I am at a point where I should not be surprised anymore by how quickly some investors want to get moving.  It is the exact opposite of a phrase that has been around for a number of years describing investors who love research – Paralysis by Analysis!  I wish I were more witty and could come up with a quick alliteration to describe the opposite problem.

Too many investors continue to jump into the real estate market with no understanding of why they are investing in the first place and to make matters worse, they have no clear plan for how to manage their future investing.  Not manage their portfolio, but to manage themselves and their plan for investing going forward.  I speak to investors on a weekly basis who are in need of assistance with a “problem” house they have bought.  Usually, they bought the house because the marketing looked slick, the picture of the house was great and the person on the other end of the line promised to handle everything.  Eight hours later they were under contract and after a couple of short weeks they were in the game!  Of course, they soon find out that the property is not rehabbed to a high standard, the property has a hard time keeping tenants and that company who told you there would handle everything is having a hard time finding their phone to answer or call you back.

The warning signs about bogus companies have been out there for years, but it is still up to the investor to do their own due diligence.  Proper due diligence has more to do with effort and time than it does with where you look or what you find.  A real estate investor purchasing a turnkey investment property today needs to understand that the market is changing in many cities around the country, but that does not mean you have to invest Today to get a good deal.  Beginning your research and gathering the needed information to feel comfortable is an essential step, but that step leads to the next step and to the next step and eventually to purchasing a property.  If someone tries to tell you that all the good deals will be gone before you get around to buying, you need to keep looking.  In order for an investor to have a good and healthy turnkey investing experience, they need to have a solid understanding of who they are doing business with.

  • How long have they been in business?
  • What makes them a strong choice as a company?
  • What are the factors that make them stand out among so many choices for investors?

These are all very important questions for an investor to ask and feel comfortable with the answers long before every buying a property.

Purchasing For Yield

Whatever happened to good, old-fashioned, solid returns of 7-9%?  When did it become such a negative to have a consistent performing property in your portfolio that you could rely on year over year to produce a positive return?

Investors today have so few options when it comes to consistent rates of return and to hear someone talk about consistency in real estate may seem a bit crazy.  But consistent returns are out there and while they may not always be double-digit returns, what is wrong with a 7-9% return?  With interest rates being forced down, investors are finding it harder and harder to locate good solid rates of return that they can count on.  Many investors are turning to turnkey real estate opportunities to find higher yields without having to join the landlord game.  Unfortunately, the reach for higher yields carries a counter balance…much higher risk.

Those risks include turnkey companies selling older properties – some built 60-80 years ago.  Under renovated properties is another huge risk for investors buying some of the higher yield properties as holding down renovation costs is a way to lower the entry-level for investors.  The lower the entry-level, in theory, the higher the yield can be.  Under staffing can also be a major risk for an investor as an understaffed company means a lot of work being preformed and managed by a small group of people and can lead to mistakes and sometimes costly choices where the company is forced to overlook essentials.

Investors who are buying turnkey rentals really need to fall into one or two categories of investor.  One category is an investor who is not interested so much in real estate, but likes the idea of a solid, appreciating asset that works as a good hedge against rising inflation.  Your acquisition cost remains neutral, yet as inflation rises, the opportunity for your rents to rise as well exists.  That allows you to acquire an asset at today’s prices and reap the benefit of higher rents.  Of course, everything else in your life will go up in price as well, so this is simply a hedge play.

The other category is the investor who is either looking to diversify into another area of the country, another segment of the real estate investment market or simply does not have the time to manage the investment process.  Many turnkey opportunities appeal to this type of investor because it lowers the barrier of entry for an investor and provides a chance to meet their investment goal.

However, both of these buyers are highly sought after and marketed to and one of the biggest marketing pulls is dangling 15 to 18% returns on turnkey properties.  Again, I ask the question, regardless of your reason for wanting to buy turnkey properties, what is wrong with a consistent 7%, or 8%, 9% or even 10% return on an investment property?  When did that return become one to turn your nose up at?

Using Promoters To Find Properties

I have several very good relationships with companies in the real estate industry whose main focus is to locate opportunities for other passive investors.  Many times, the opportunities they are locating are with turnkey companies.  There only focus it to point a client in the direction of an opportunity to buy.  Because of the size of my company, we get pitched on almost a weekly basis from people who want to “promote” our company and sell our houses to their students or followers or clients.  That puts us in a pretty unique position to see both the good and definitely the bad examples of these promoter companies.

First, if you are an investor and you are having to pay someone to get access to their “exclusive” list of properties, you might want to think twice about going forward.  Are they all bad if they charge you money for their expertise?  The answer is no.  But there are definitely problems that are inherent with this model.  It is no different from foreign property promoters charging clients thousands of dollars to “tour” American cities to buy investment property.  Too often a grey line is created that blurs black and white and makes it harder for the buyer to know exactly what they are paying for…and here is why.

Often times promoters receive a fee from the companies whose properties they are peddling.  They essentially get paid by both sides of the equation.  There is nothing wrong with that and it does not mean that you cannot trust an investment property promoter – it just means as an investor you have to do even more due diligence before buying.  Unfortunately, there are many things going on in a scenario like this and it is possible for the best interest of the final investor to be last thought calculated in the deal.

There are a few questions every investor should ask of a promoter before moving forward.  Such as – are you getting paid by the vendor that you are referring me to?  That is a simple straight forward answer and their full disclosure should be expected.  Second, ask the promoter if they have a real estate license and how they accept funds.  Third, ask the promoter how many properties they personally own with the company they are referring you to.  You can start getting a clearer picture from this point and an understanding of whether they promote anyone and everyone that will pay them, or if they promote high quality companies that they have had a positive experience.  Believe me, there is a difference.

As I said, I have met many, many promoters and been pitched by dozens.  I have done business with one.  I have a long-standing relationship with another company that is not a promoter but gladly tells their students about our company. Recently we agreed to do business with one other company.  Three total companies that I feel put their clients first.  After seeing company after company bounce around and simply look for anyone with a pulse to provide them with properties, we are sticking with a very short list of people we will enter into a referral relationship with.  On your end as an investor, I would suggest you do the same and do your due diligence before paying someone else to share their secret stash of houses.

 Shiny Object Syndrome

Being attracted to the shiny bell and the loud whistle that are hung around the neck of a pending disaster house, is a very, very common occurrence for buyers of turnkey properties.  For me, this is the easiest one to address and I put it very plainly.

If the best thing you can say about a turnkey property is that it comes with a 12 month guarantee that you will not have any maintenance or vacancy, then you may not have done enough homework.  I am not against any company offering guarantees on their homes.  However, if they are used as a selling tool – a reason for an investor to buy the property – then the investor should really ask the question of “why do you need the guarantee”?  How about asking what would happen if the guarantee were not in place.  That should give you about all the answer you need.

Again, there is nothing wrong with a guarantee…as long as it is not used to attract an unsuspecting buyer who does not realize how poorly the property is going to perform when the guarantee is over.

Like I said, this was not going to be an exhaustive list.  But I get the chance to hear from a lot of investors and there is still a healthy mix of investors who are attracted to these 4 mistakes.  I have never seen a group of investors more excited to spend money than today’s brand new investor attracted to turnkey.  Investors like chasing yield and LOVE to tell others  about the great buy they just made – while it is still a paper return.  Too many continue to outsource the front end work to promoters without understanding the whole relationship and doing their own due diligence and lastly the attraction and pull of a guarantee still holds a heavy sway over buyers and some turnkey companies are quick to use them as an attractive selling tool.

 This small list was only meant to help investors identify a few hurdles and help them get pointed in the right direction.  So before anyone starts piling on turnkey vendors, just remember that they serve a huge swath of the current investment market and they are in high demand.  So, knowing what to avoid and how to find a great turnkey company just might come in handy…

Photo: dprevite

About Author

Chris Clothier

In 2005, Chris Clothier (G+) began working with passive real estate investors and has since helped more than 1,100 investors purchase over 3,400 investment properties in Memphis, Dallas and Houston through the Memphis Invest family of companies.

21 Comments

    • Chris Clothier

      Hey Michael –

      Thanks for reading and leaving a comment. I think that would pretty much fall under #1 – having money burning a hole in your pocket. Of course, your 2-word phrase summed it up a little more succinct!

      Take care – Chris

  1. Jeff Ledbetter on

    Great article Chris.

    For guys like me (small business owner who doesn’t have enough hours in the day), working with a trustworthy turnkey company is a blessing. I have dealt with a few different ones and MemphisInvest has been my best experience hands down.

  2. Great article and reminder to stay rational in any real estate transaction. I’ve seen my fair share of turnkey providers being an overseas investor who now lives in the US and buys property here. It’s very easy to get swept up in it all, but at the same time, there are some great deals out there.

    Investors need to step back, and take more time with the process. Reality and what marketers say can be very different. Buying in groups creates peer pressure and should definitely be avoided.

    • Chris Clothier

      Hi Shelli –

      Thanks so much for taking the time to comment on the article. I think the whole buying process needs to come down to a mentality of taking your time. There is no rush. You can buy in any environment if you have taken the time to do some research, know who you are dealing with and can easily understand and explain to you neighbor exactly what investment you are making. If you don’t know enough to quickly and easily explain it to a neighbor, you might want to slow down just a tad!

      Thanks again for reading the article – take care.

      Chris

    • Chris Clothier

      Hey Jason!

      Good to see you commenting on the article and I appreciate it. You are correct in your statement that it only take a few properties before most investors figure out if they are happy or not with their investment. Of course, I feel bad for those who buy two hands worth of properties at one time only to find out their portfolio is not all they thought it was going to be…

      Thanks again for commenting and I agree – “trigger happy” is a great way to describe some investors (I should know I was one of them at one time). I’ll work that into one of my future articles.

      All the best to you – Chris

  3. So how do you get Fortune Builders to send you leads without paying them Chris? Sounds too good to be true? There is nothing inherently wrong with paying for leads providing you look after the investor surely?

    • Chris Clothier

      Dean Letfus ( I am assuming) I think I spelled your name right! If you are just some random Dean then I apologize for getting you confused…

      Thanks for taking the time to read the article and leave a comment. I am pretty sure I said exactly what you typed about there being nothing inherently wrong with a promoter getting paid or with a company paying a promoter or even paying a referral. It happens every day and simply because someone is being paid does not mean there is a problem. I think you would agree that not all property promoters operate with the final investor in mind. And that is the point, an investor needs to make sure that they are doing their homework on a property provider, a promoter and even the property.

      A timely example I will share is that I received an email yesterday from a company from the West Coast that wants to promote my properties to their list of clients. I have no idea who they are and have never spoken with them. They have not been to my operation in Memphis or Dallas and yet they are ready to put my properties on their website and sell them…for a fee of course. I get these kinds of requests quite often.

      The whole reason I mention that in the article is because of emails like that. How many other companies are they sending this same message to? We are a big enough company and in a strong enough position to say no, but they will eventually find someone who will say yes and pay them to promote their properties and that will not be good for their “list”. The promoter will have no idea of the quality, the craftsmanship or the experience that an investor on their list will have with that turnkey provider – they just know that they will get paid. And – that is a problem.

      You asked about Fortune Builders and that is the one company in the article that I mention we do business with. The difference is night and day. The owners have several dozen properties with us as do some of their siblings and parents. Many of their employees have invested in Memphis and Dallas properties and finally they have introduced us to their clients that ask about passive investments. They do not promote our properties but introduce us to their clients who are looking for what we provide. We then have contact with their clients directly to judge if they are a good fit for our company and vise-versa. And their real estate company is paid a referral. We love doing business with them because they do business in exactly the opposite way of the person who emailed me yesterday and exactly opposite of many slick sales promoters selling houses for anyone who will pay them.

      So to your point, I agree, there is nothing wrong with promotes or referrals so long as the investor is always the focal point of everyone involved.

      I have read a lot of your comments lately on here and you seem to be doing quite well since you moved to Memphis. Best of luck to you with your business.

      All the best – Chris

  4. I agree that a 7-9% return should be enough (maybe even 6 %). Most investments that promise more than that are too risky to trust. If a bird in the hand is worth 2 in the bush (or whatever variation of this saying you choose), why chance losing your money? Greed and the dream of more, more, more? At what point is it enough?

    • Chris Clothier

      Hey Lee –

      Sorry for my delayed response, but I really appreciate you taking the time to read and comment on this article. I think there is a balancing act between making good investments, maximizing your returns and creating a safe environment for your money to grow. Constantly pushing the boundaries and falling into the mind trap that higher paper returns put more money in your pocket is a great way to find yourself on the wrong side of the ledger in the future.

      Loved your comments and appreciate you taking the time to leave them.

      Chris

  5. Great and worthy tips, Chris, thank you 🙂 Yes, particularly when investing out of state (or country) – researching your providers, turnkey or not, is the prime skill required. Forget how good you are with your hands, you’re not going to be there in person to repair or renovate – make sure you use a good rehabber (etc etc).

    • Chris Clothier

      Ziv –

      Great tips and points for investors buying out of area. Who you do business with is so much more important than the rate of return. That is secondary and can be achieved on a consistent basis with a good team. WIthout a good team, you are in trouble regardless of what the paper said your return was going to be.

      Take care –

      Chris

  6. Rock solid information you have provided. Will be looking forward to any new articles you may write in the future. Plus will be reading any and all that you have written that is posted. Keep up the great work.

    • Chris Clothier

      Lou –

      I appreciate the kind response. Be sure and leave comments on any articles that you find interesting here on the site. All of us who write them really appreciate the chance to go back and forth and respond with readers.

      All the best to you –
      Chris

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